September 28, 2008 / 7:40 AM / 11 years ago

Benelux governments rescue Fortis to avert U.S. contagion

BRUSSELS (Reuters) - Benelux financial group Fortis underwent a shotgun nationalization on Sunday after emergency talks with European Central Bank President Jean-Claude Trichet to prevent U.S.-style financial contagion engulfing one of Europe’s top 20 banks.

A pedestrian walks past the headquarters of Belgian-Dutch financial services group Fortis in Brussels, September 26, 2008. REUTERS/Francois Lenoir

The Belgian, Dutch and Luxembourg governments agreed to inject 11.2 billion euros ($16.4 billion) into the banking and insurance company, which will sell the parts of Dutch bank ABN AMRO that it bought last year, precipitating its troubles.

Belgian Prime Minister Yves Leterme announced the bailout at a news conference after a weekend of high drama in the first major bank crisis to hit the euro zone in 13 months of global financial turmoil that began in the United States.

Sources close to the talks said the Benelux governments chose a partial state buyout after investor confidence collapsed last week and two private bidders offered paltry terms.

“We could have not intervened, but the question was whether Fortis would have survived on Monday,” Dutch Finance Minister Wouter Bos told reporters.

Each government will take a 49 percent stake in Fortis banks in their respective countries. Belgium will put in 4.7 billion euros, the Netherlands 4.0 billion and Luxembourg 2.5 billion, the latter in the form of a convertible loan.

The most likely private bidder, France’s BNP Paribas, pulled out after offering just 1.60 euros per share, compared to Friday’s closing price of 5.20, and demanding state guarantees against possible future losses, one source said.

Another source close to the talks said BNP Paribas had offered 2 euros a share and the Dutch ING Group just 1.5. “There was no serious bidder for the intrinsic value of the whole group,” the source said.

Trichet, who as ECB head is responsible for safeguarding financial stability in the euro zone, joined Leterme, Bos and the heads of both countries’ central banks in the talks.

The presence of the ECB chief — unprecedented in a commercial bank rescue — underlined the seriousness of concern for the integrity of the euro zone’s financial system.

TOO BIG TO FAIL

Financial players around the world were hoping U.S. lawmakers would finally sign off on a deal to create a $700 billion government fund to buy bad debt from ailing U.S. banks in a bid to stem a credit crisis threatening the global economy.

Fortis’ size, with 85,000 staff worldwide, and its cross-border structure made it too big to be allowed to fail. Its nationalization dwarfs Britain’s state takeover of fallen mortgage lender Northern Rock last year.

Fortis Chairman Maurice Lippens, accused by shareholders of concealing the bank’s troubles for too long, resigned.

Fortis’ precursors traded with Catherine the Great and financed the U.S. purchase of Louisiana from Napoleon. Its main constituent bank, Societe Generale, was the chief financier of the industrialization of Belgium and the Netherlands.

BNP Paribas and ING declined comment on reports that they had bid for all or part of Fortis.

A mooted ING purchase of the Dutch operations of ABN AMRO would raise competition issues since the combined firm would dominate retail banking in the Netherlands.

New Fortis CEO Filip Dierckx inadvertently gave an insight into the rescue plans when a document he took into the meeting with the Belgian and Dutch finance ministers and central bankers and Trichet was photographed by Reuters.

It listed a range of options including “Fortis sells its stake in ABN AMRO for x billion euros to xx” and “governments of Belgium and Luxembourg to invest xx billion euros in Fortis”.

Fortis’ portfolio of structured credit would be written down by an unspecified number of billions of euros, it said. There was no confirmation of any write-off in the official statement.

ABN TAKEOVER BLAMED

The problems at Fortis, whose shares dropped by a third last week on investor concerns about its liquidity and funding, stem from last year’s 70 billion euro purchase of ABN with partners Royal Bank of Scotland and Spain’s Santander.

Fortis has been weighed down by its 24 billion euro outlay for ABN in a market that is neither conducive to more capital increases nor willing to pay for the assets it wants to sell.

Its shares plummeted more than 20 percent to 15-year lows on Friday despite a statement that its position was strong and a pledge to expand asset sales to as much as 10 billion euros.

The group’s market capitalization slumped from 50 billion euros after the ABN purchase to just 12 billion euros on Friday.

The stakes were high in Belgium, where Fortis is the biggest private sector employer and more than 1.5 million households, roughly half the country, bank with the group.

Belgian-Dutch financial services group Fortis Chief Executive Filip Dierckx holds documents as he arrives for a meeting with Dutch Finance Minister Wouter Bos, ECB President Jean-Claude Trichet and Belgian Prime Minister Yves Leterme in Brussels September 28, 2008. REUTERS/Yves Herman

Fortis named Dierckx as chief executive on Friday evening, hastily replacing caretaker Herman Verwilst.

In London, regulators were in talks on the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalized.

Additional reporting by Philip Blenkinsop, Yves Herman in Brussels, Reed Stevenson in Amsterdam, Matthieu Protard in Paris, Michele Sinner in Luxembourg, Steve Slater in London; Writing by Paul Taylor; Editing by Alexander Smith and Dale Hudson

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